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Global Industry Outlook:
A Platform for Innovation?
Jon Rager
SVP, RISI Analytics
2016 Annual Executive Conference
Renewable Bioproducts Institute
April 2016
© Copyright 2016 RISI, Inc. | Proprietary Information
News, Markets & Price Service: keep
up with the latest prices, financial news,
and market trends.
Forecast & Analysis Service:
comprehensive market forecasts of
demand and supply worldwide.
Mill Intelligence Service: costs &
profits, projects, equipment, and capital
investments for 4,500 global mills.
Industry Events: regional outlook
conferences and topical events located
on every continent.
RISI is the leading information provider to the forest products industry.
2
(RISI Analytics)
© Copyright 2016 RISI, Inc. | Proprietary Information
Agenda
• Global macro-economic snapshot
• (Abridged) industry outlook
• Perspectives on innovation
© Copyright 2016 RISI, Inc. | Proprietary Information 3
Global Economy Growing Moderately, with Heightened RisksAnnual Real GDP Growth
Source: IMF, RISI
2.4% 2.4% 2.6% 2.5%
14 15 16 17
USA 0.9% 1.5% 1.6% 1.3%
14 15 16 17
Euro Area
1.3% -0.4% 0.1% 1.8%
14 15 16 17
Latin America
7.3% 6.9% 6.4% 6.1%
14 15 16 17
China
© Copyright 2016 RISI, Inc. | Proprietary Information 4
5
Developed Economies Leading Global Growth…Global Real GDP* Growth
-2%
-1%
0%
1%
2%
3%
4%
5%
6%
95 97 99 01 03 05 07 09 11 13 15 17
*Measured at purchasing power parity exchange rates
Source: IMF, RISI
© Copyright 2016 RISI, Inc. | Proprietary Information
6
…While Emerging Markets Have Slowed…Annual Real GDP Growth
-10%
-5%
0%
5%
10%
15%
20%
Brazil Russia
India China
South Africa
Source: IMF, RISI
© Copyright 2016 RISI, Inc. | Proprietary Information
-80%
-70%
-60%
-50%
-40%
-30%
-20%
-10%
0%
…As Commodities Have Fallen…Percentage Change Since July 2014
© Copyright 2016 RISI, Inc. | Proprietary Information 7
-60%
-50%
-40%
-30%
-20%
-10%
0%
…And Currencies Have CrumbledPercentage Change Since July 2014 Versus US Dollar
© Copyright 2016 RISI, Inc. | Proprietary Information 8
9
Oil Prices Staying Low on OversupplyBrent North Sea Crude Oil, Price per Barrel
0
10
20
30
40
50
60
70
80
90
100
110
120
130
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Brent € Brent $
Source: Energy Information Administration, RISI
© Copyright 2014 RISI, Inc. All rights reserved.
© Copyright 2016 RISI, Inc. | Proprietary Information
10
The US Economy
USA – “Oasis of Prosperity”?
• Partially decoupling from rest of world
• Domestic-based growth is healthy Employment and wage growth
Cheap energy
Housing
• Non-domestic side of economy struggling Manufacturing
Exports
© Copyright 2016 RISI, Inc. | Proprietary Information
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 12 14
2015 Was Another Year of Healthy Job GrowthChange in US Total Payroll Employment, Millions
Source: Bureau of Labor Statistics
© Copyright 2016 RISI, Inc. | Proprietary Information 11
12
Eurozone Economy Growing, But Weakly Annual Real GDP Growth
Source: IMF, RISI
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Germany
France
Italy
UK
Eurozone
© Copyright 2016 RISI, Inc. | Proprietary Information
Hard Landing for China Is UnlikelyReal GDP Growth, Annual Percent Change
0%
2%
4%
6%
8%
10%
12%
14%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Source: NBS, RISI
© Copyright 2016 RISI, Inc. | Proprietary Information 13
Industry Outlook Overview
• World demand continues to grow Although limited by uneven economic performance
And competition with alternative products
• Producers reducing investment in new capacity Even in China as demand growth slows
Shift toward M&A, especially in North America
• Becoming less “green” but more “sustainable”? Recovered paper usage slowing
Wood pulp share of furnish stabilizing
China at the center of this shift
© Copyright 2016 RISI, Inc. | Proprietary Information 14
Further Slowdown in World Paper and Board Demand Growth
• Usage limited by a number of factors Sluggish performance of the general economy
Accelerating substitution by electronic alternatives
Pressure for lighter-weight grades
Shift in Chinese economy
• Global paper and board demand still rising But only about 1% per year
Translating into 4 million tonnes annually
© Copyright 2016 RISI, Inc. | Proprietary Information 15
World Paper and Board DemandMillion Tonnes
© Copyright 2016 RISI, Inc. | Proprietary Information 16
Most of the Growth in the Industry Is in Packaging—Modest Effect on Market Pulp
17© Copyright 2016 RISI, Inc. | Proprietary Information
0
50
100
150
200
250
300
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
Packaging/Specialty
P&W
Tissue
News
0
20
40
60
80
100
120
140
160
180
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
Tissue +P&W
Dramatic Slowdown in Chinese Paper and Board Demand
• Annual growth rate slowed to 2.2% in 2011-2014 From an average of 9.7% in 2001-2010
Slight uptick expected to 2.5% over next two years
Electronic substitution and shift in general economy
• Other developing regions will generate just as much growth as China Led by Asian countries such as India and Vietnam
• Developed world demand will drop 1.9 million tonnes Due to strong electronic competition
© Copyright 2016 RISI, Inc. | Proprietary Information 18
World Paper and Board Demand by Major RegionMillion Tonnes
0
100
200
300
400
500
600
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
China Developing Mature
© Copyright 2016 RISI, Inc. | Proprietary Information 19
Containerboard Will Remain the Largest Grade
• However, growth has slowed sharply Due mainly to a significant downshift in China
Along with light weighting around the world
• Other packaging and specialty grades maintain positive growth Increasing consumer packaging in developing world
Expansion of specialty markets
• Graphic grades continue to decline, led by newsprint While tissue leads in growth rate but remains small
© Copyright 2016 RISI, Inc. | Proprietary Information 20
World Paper and Board Demand by Major GradeMillion Tonnes
0
100
200
300
400
500
600
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Newsprint Tissue Other Printing and Writing Containerboard
© Copyright 2016 RISI, Inc. | Proprietary Information 21
Producers Throttling Back on Expansion Plans
• Even Chinese companies are spending less Although encouraged by forced closures of old mills
Poor profitability across the whole grade spectrum
Including tissue
• Producers in the developing world still adding capacity While keeping a wary eye on demand prospects
• Developed world still seeing some investment Conversion of graphic paper assets to packaging
Installing new tissue machines
© Copyright 2016 RISI, Inc. | Proprietary Information 22
World Paper and Board Capacity ExpansionMillion Tonnes
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
© Copyright 2016 RISI, Inc. | Proprietary Information 23
Slowing Recovered Paper Usage
• Mainly due to deceleration in China Especially in the containerboard sector
Shift toward virgin boxboard for consumer packaging
New tissue capacity almost entirely virgin based
Drop in newsprint output
• Lower bulk recovered paper prices Encouraging new recycled containerboard capacity
Along with demand for lighter basis weights
Declining graphic paper usage supports high grades
© Copyright 2016 RISI, Inc. | Proprietary Information 24
World Usage of Recovered Paper and Wood PulpMillion Tonnes
100
125
150
175
200
225
250
275
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Wood Pulp Recovered Paper
© Copyright 2016 RISI, Inc. | Proprietary Information 25
North American RCP Domestic Demand
vs. Exports
20%
25%
30%
35%
40%
45%
50%
55%
60%
65%
70%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
Mil
lio
n T
on
ne
s
Domestic ConsumptionNet ExportsRecovery Rate
Net export share
2000: 17%
2005: 27%
2008: 33%
2012: 41%
2013: 39%
2014: 39%
2015: 40%
26 © Copyright 2015 RISI, Inc. All rights reserved.
Bleached Hardwood Kraft Leading
Wood Pulp Demand Growth
• Major positive factors include High furnish shares in tissue and virgin boxboard
Substitution for other grades
Woodfree papers taking share from mechanical
• Bleached softwood kraft still growing slowly Strength required in many paper grades
Especially as basis weights drop
• Dissolving pulp slowing sharply Big drop in cotton prices and increased availability
Weak performance for acetate tow
© Copyright 2016 RISI, Inc. | Proprietary Information 27
World Wood Pulp Demand by Major GradeMillion Tonnes
0
40
80
120
160
200
240
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
DP BSK BHK Other Paper Grade
© Copyright 2016 RISI, Inc. | Proprietary Information 28
China Is Still Leading the Growth in
Wood Pulp Usage• Despite slowing paper and board output
Tissue and virgin boxboard production increasing
Closures of old capacity based on nonwood fiber
Rising quality standards
• Asian developing countries using more wood pulp But limited markets compared to China
Focus still on recycled packaging expansion
• Europe and North America sliding Decline of graphic paper
Highly penetrated tissue and virgin packaging markets
© Copyright 2016 RISI, Inc. | Proprietary Information 29
Wood Pulp Demand by Major RegionMillion Tonnes
0
40
80
120
160
200
240
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Latin America Other World Other Asia China Europe North America
© Copyright 2016 RISI, Inc. | Proprietary Information 30
Wood Pulp Production Will Continue
to Shift to the Southern Hemisphere• Brazil will be the epicenter of investment
Extensive availability of low-cost fiber
Weak currency and accommodative government
High prices for green energy
• New projects in Chile, although more roadblocks Indonesian industry will expand
Could Argentina finally develop?
• Softwood capacity will grow in Europe Older pulp mill closures release fiber
Growing inventories from sound forest management
© Copyright 2016 RISI, Inc. | Proprietary Information 31
Wood Pulp Production by Major RegionMillion Tonnes
0
40
80
120
160
200
240
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17
Latin America Other World Other Asia China Europe North America
© Copyright 2016 RISI, Inc. | Proprietary Information 32
What does it mean for innovation?
© Copyright 2016 RISI, Inc. | Proprietary Information 33
• Commodity: cost and operational leadership
• Commodity: industrial-sized customer strategy
• Consumer-driven product and business strategy
• Conventional and radical technology intervention
Key Takeaways
• Global economy growing but unevenly
• Industry also growing but:
Packaging gaining share
China slowdown is far-reaching
Other developing regions gaining relevance
• No shortage of opportunity for innovation
Conditions create different pathways,
Technology plays a key role in all of them
Thank you!© Copyright 2016 RISI, Inc. | Proprietary Information 34